GOLDMAN: $700 billion will leave China this year — but you don't need to worry, yet

Visitors
run away from a tidal bore as it surges past a barrier on the
banks of Qiantang River in Hangzhou, Zhejiang province, September
20, 2013.REUTERS/China
Daily

China will see over $700 billion (£487 billion) of capital pour
out of the country in 2016, according to Goldman Sachs.

But the bank says there's no need to worry that continuing
outflows will lead to a currency crisis any time soon.

In a massive new note addressing the concerns of investors about
China's currency, the renminbi, Goldman says that while capital
outflows from China have increased since 2013, one of the biggest
concerns investors have right now — the fall in FX reserves —
isn't a huge issue yet.

One of the biggest concerns when it comes to China is the massive
slide in the amount of money being held in foreign currencies by
the People's Bank of China.

That fall in foreign currency held in China has led some to
predict a coming currency crisis in the country, but Goldman
Sachs isn't too worried about that right now, saying that on
virtually all measures, currency reserves are at what they call a
"comfortable level". Here's Goldman on some of the most commonly
used metrics (emphasis ours):

Import cover: Defined as the number of months imports can be
sustained should all inflows cease. The IMF uses three months’
import coverage as the benchmark for reserves. China’s FX
reserves cover 22 months of imports.

The ratio of reserves to short-term debt: This is the most
widely used metric for reserve adequacy and is known as the
Greenspan-Guidotti rule. It specifies that reserves should cover
100% of short-term debt. On the latest available information,
China’s FX reserves comfortably cover short-term external
debt, by over 300%.

Composite measures: The IMF has sought to aggregate several
measures of reserve adequacy in order to capture a range of
risks. The Fund has proposed a measure that includes short-term
debt, portfolio liabilities, export income and broad money, and
that also accounts for each country’s exchange rate regime.
Reserves in the range of 100-150% of this metric are considered
broadly adequate for precautionary purposes. At the
moment, China’s reserves fall in this 100-150% range.

While Goldman is fairly bullish on the future of China's currency
reserves, it does point to concerns in one area, that of
so-called "broad money" or M2. Broad money is a metric "designed
to capture the risk of domestic sales of local currency assets"
and includes not just physical cash, but also deposits held in
banks and cash held in mutual funds.

Goldman says that China's broad money situation isn't great, with
reserves covering just 18% of broad money. The IMF recommends
that at least 20% should be covered. Here's the
chart:Goldman
Sachs

So while Goldman isn't hugely worried about the foreign exchange
situation in China just yet, the bank does warn, in the header of
one chart that reserve rates are "approaching the lower end of
the adequacy range." Here's that chart:Goldman
Sachs

What happens going forward is unclear, but there's no need to
panic yet.